FRANKFURT/VIENNA: European Central Bank policymakers held out the possibility Thursday of taking further measures to boost the flagging eurozone economy after a cut in their deposit rate to zero showed no sign of jolting banks into lending out more money.

The ECB cut its main interest rate last week by a quarter point to a record low of 0.75 percent and reduced the deposit rate it pays banks for parking money with it overnight to zero in an effort to breathe life into the flagging eurozone economy.

The unprecedented cut in deposit rates to zero – approved last week and active from Wednesday – means banks now get nothing for parking cash at the ECB. They responded by simply shifting nearly half a trillion euros out of the ECB deposit facility and into their current accounts at the central bank.

Faced with fading inflation pressures and no sign banks are about to funnel more money to business to help the stagnating economy, ECB policymakers signalled they could act again.

“Should the situation deteriorate, there is no article of faith preventing us from going below 0.75 percent,” said ECB Governing Council member Klaas Knot.

“Currently, we regard 0.75 percent as appropriate,” Knot, who is also chief of the Dutch national central bank, told the Financial Times Deutschland in an early release of an interview to run in its Friday edition.

Knot is widely regarded as belonging to a core of hard-line ECB policymakers who take a tough line on inflation. His comments are the clearest signal yet that the ECB could be open to further rate cuts after last week’s move to a record low.

Highlighting the eurozone’s fragile economic health, the ECB said in its monthly bulletin released earlier Thursday that growth in the 17-country bloc is weak and “heightened uncertainty” is weighing on confidence.

Another ECB policymaker, Austria’s Ewald Nowotny, said in Vienna: “Growth perspectives all over Europe are deteriorating.

“Within the European Union and the eurozone we have an increasing differentiation of growth rates.”

ECB President Mario Draghi also kept the door open Monday to further interest rate cuts, saying any decision on further action would depend on economic data.

Official data released Thursday showed eurozone factories unexpectedly stepped up production in May, but output fell in France and the Netherlands in a fresh sign that the bloc’s debt crisis is also hurting its stronger economies.

Knot held out the possibility the ECB could cut its deposit rate into negative territory – a move that would mean banks effectively paying the ECB to hold their money overnight.

“We should learn from the experience of other countries with negative interest rates before we decide whether that is an option for us,” said Knot.

Another ECB Governing Council member, Jozef Makuch, said in Vienna: “Where necessary, the ECB will use measures already used or new ones.”

Banks slashed the amount of money they parked at the ECB after it stopped paying interest on overnight deposits Wednesday, but there was no sign they were using it to lend more or buy the bonds of crisis-hit eurozone states.

Banks are reluctant to lend to each other for fear of not getting all their money back, so they have deposited back with the ECB much of the cash from the central bank’s 1 trillion euros cash boost in December and February.

ECB policymaker Josef Bonnici said the plunge in overnight deposits – to 325 billion euros from more than 800 billion a day earlier – was “encouraging” and said he expected to see a rise in loans to firms and consumers as a result.

However, Draghi has said he expects little impact on what banks and other investors do with their spare cash – a view reinforced by them simply moving funds from the deposit facility to their current accounts at the central bank.

“It’s just a shifting of cash from one place to another and ultimately it’s a zero sum game,” said Simon Peck, rate strategist at RBS.

The current account facility – which also gives no return but in some respects is easier to use – jumped to 540 billion from 74 billion the previous day, almost precisely mirroring the change in the overnight figures.

What banks do with the cash from there hangs in the balance but analysts were not optimistic it would lead to a surge in loans.

“Liquidity will remain ample but will be stuck in the current account,” said Patrick Jacq, European rate strategist at BNP Paribas in Paris.

“[For this to change] we need a strong improvement in global conditions, not only in money markets, but in sovereign debt, the economy.”

A version of this article appeared in the print edition of The Daily Star on July 13, 2012, on page 6.

Recommended

Advertisement

Comments

Your feedback is important to us!

We invite all our readers to share with us their views and comments about this article.

Disclaimer: Comments submitted by third parties on this site are the sole responsibility of the individual(s) whose content is submitted. The Daily Star accepts no responsibility for the content of comment(s), including, without limitation, any error, omission or inaccuracy therein. Please note that your email address will NOT appear on the site.

Alert: If you are facing problems with posting comments, please note that you must verify your email with Disqus prior to posting a comment. follow this link to make sure your account meets the requirements. (http://bit.ly/vDisqus)